Five Good Reasons to Have Independent Board Members

Family-owned businesses that have independent board members are frequently among the best-managed and best-governed.  They have reached a level of maturity where family members recognize that outside voices provide stability, objectivity and protection from certain business risks.

Let’s define what “independent”  means for our purposes.  Typically, an independent director is not an employee, a shareholder or a member of the family, even (or especially) by marriage.  Independence means that the independent director looks at what is good for the company and its shareholders, employees and customers, has the attitude of independence, and is empowered by the board and shareholders to put that independence to work.

So, what are five good reasons for having independent directors?

1. Fresh ideas.  An independent director is not wedded to family business traditions and should be free to examine the business with clarity and objectivity, even at the risk of challenging long-held, sacred assumptions about what is good for the company.
2. Needed skills and experience.  An independent director should have special financial, marketing governance or strategic skills and experience that he or she can bring to bear on the company’s current operations and future prospects.
3. Resolution of conflicts of interest.  In a family business, conflicts of interest are almost inevitable.  Personal interests of board members may get in the way of implementing decisions even when they are arguably in the best interests of the company.  Having at least two “non-interested” directors on the board opens up a method of approving transactions under many state laws where some family board members are considered to have conflicting interests.  Challenges to transactions by unhappy shareholders can be avoided or rendered less likely if approved by the independent directors.
4. Accountability.  Independent directors are better able to hold management and other directors accountable where their actions and views are not subject to internal family politics.
5. Continuity planning.  Independent directors may be essential in helping the board and the family plan for succession or recruitment of new executive employees.  They can impose objective standards on the succession process.

Bringing in effective independent directors is not inexpensive.  Family-owned businesses need to be prepared to pay for experienced directors and monitor their performance to derive the most value from their service. Keith Baldwin is a business transactions and securities lawyer with a forty year history of serving clients’ legal needs.

Keith focuses his practice on business relationships, including mergers and acquisitions, agreements among owner-entrepreneurs, and best practices for corporate governance. Keith can be reached via email at keithbaldwin@dwt.com or directly at 425.646.6133.